What is a Rent-to-Own Home Lease option?

What is a Rent-to-Own Home Lease option?

A rent-to-own home lease option agreement is an agreement between a buyer/renter and a seller/landlord where the renter pays an
option fee
when they sign the lease and then has the option to purchase the home after the lease period has ended.

A rent-to-own can be a great segue into home ownership for those who may not qualify for a traditional mortgage. When looking for rent-to-own homes you might encounter some unfamiliar terminology; it can be very helpful if you take some time familiarize yourself with some of the various lingo. If you haven't read the
What is a Rent-to-Own Home?
article yet then we recommend you do so before continuing.

Lease option contract terms

As we've said before, a rent-to-own home lease option contract is an agreement between the renter/buyer and a seller/landlord where the buyer pays an upfront fee for the option to purchase the home at the end of the lease. Like in other lease agreements the lease period can vary on a case by case basis, though a typical rent-to-own home lease period is between 1 to 5 years.

The lease period and practically every other clause in a lease option contract is negotiable, so be sure to familiarize yourself with these contracts and negotiate contract terms that are helpful to you.

Down Payments and Fees

Typically in a lease option agreement the buyer pays an upfront fee called an
Option Fee
This fee gives the buyer the choice to purchase the home at the end of the lease. Typically, as a buyer, you'd always want to exercise that option to purchase. However, there may be circumstances that could influence your decision and make you want to hold out on purchasing. The downside to not using your option to purchase is that you will lose any money put towards a down payment such as a rent premium. But if you didn't have the option clause in your contract then you may be looking at legal recourse from the seller or a house you can't afford.

What happens when the lease expires:

If you've spent the time during the lease period saving up money and building your credit then you'll be able to purchase the home. When the lease period expires you apply for a traditional mortgage and make a down payment either through accrued rent premiums or savings. If, for some reason, you were not able to build up enough credit to get a loan or do not have enough money to purchase the home, you could forfeit any money that you've paid towards the down payment on the home.

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